The US and its trade “prisoner’s dilemma”

In the Trump administration’s first year, the US pulled out of both the Trans-Pacific Partnership Agreement (TPP) and the International Climate Agreement. It also began renegotiating, and threatened to withdraw from, the North American Free Trade Agreement. In addition, it has questioned the usefulness of both the United Nations and the NATO security treaty, suggesting in both cases that other countries must contribute more. The US has prevented appointments to the appellate board of the World Trade Organization (WTO), which could seriously undermine the effectiveness of the WTO dispute process. In the past month, it has implemented import tariffs of 10% on aluminum and 25% on steel arguing this is necessary for national security. The US has also announced import tariffs on up to $60 billion in trade with China that will go into effect in a few months, providing time for China to negotiate and propose changes affecting its treatment of intellectual property.

Although these actions are meant to demonstrate America’s assertiveness in international relations, they also seem to demonstrate a lack of awareness of a well-known strategic dilemma that every social science student must study. That dilemma, known as a “prisoner’s dilemma,” has been used to analyze a wide variety of strategic interactions including countries choosing how protective a trade policy to have, producers with few competitors deciding about pricing strategies, governments determining how many nuclear weapons to hold, and, in one of its earliest applications, prisoners deciding whether to confess to a crime.

The central behavioral assumption in such a game is that there are several agents whose sole objective is to do what’s best for themselves. However, in each case, one’s own success is dependent in some way on what the other game players do. Positive or negative outcomes in these games depend on whether the game participants cooperate or not. When the agents are not cooperative, their own instinct to do what’s best for themselves is thwarted by similar behavior by one’s competitors, in which case, all sides suffer losses. This is a Nash equilibrium. A better outcome is available for every player in these games, but only through cooperation. Cooperation solves the dilemma; namely the problem that untempered pursuit of individual self-interest leads to inferior results for everyone in a strategic contest.

Sustaining the superior cooperative agreement can be difficult and costly. Once implemented each game player continues to have an incentive to cheat, or defect. This is especially true when the cheating can go undetected. For example, countries have sometimes cheated in trade agreements by using creative non-tariff barriers (such as internal subsidies). If other countries do not notice and complain, the defecting country can reap benefits for itself with the costs quietly shifted to its trade partners. However, once the trade partner notices the defection, it is likely to defect itself, both to reap defection benefits of its own, but also to inflict pain on the initial defector. In fact, one of the best strategies in repeated prisoner’s dilemma games is to play tit-for-tat; meaning defect in the every period after your opponent defects. In this way cooperative agreements break down.

President Trump’s recent actions can hardly be seen as subtle acts of defection though. Instead, in championing “America First,” he is blatantly defecting from past US agreements with the expressed intention of forcing countries to the bargaining table. Many Trump supporters take pride in strong–arm tactics that demonstrate a new assertiveness in international affairs. However, an effective outcome requires other countries to capitulate and strike a new deal. Even though other countries may suffer more in a trade war than the US, capitulation to US demands strikes an obvious weak posture that few countries would be willing to accept. A more likely outcome is that other countries will stop cooperating and play tit-for-tat. In this case, with the world’s largest economy unwilling to play by the longstanding international rules that it initially promoted, international institutions may all begin to crumble, and along with it, all of the joint benefits from cooperation. America First could devolve into Everyone Last.

However, this will only happen if everyone gives up on the international institutions entirely. There is a sensible alternative though, namely, if all other countries continue to maintain the cooperative agreements among themselves while reneging only on their commitments to the US. For example, countries should continue their WTO trade commitments to each other while raising barriers only against the US, if the US decides to stop playing by the rules.

An example of this has already occurred as the ten remaining countries of the Trans-Pacific Partnership, led by Japan, have agreed to implement that agreement, but only after eliminating some of the more contentious clauses demanded by the US. At the same time, they have also left open an entry option for the US if it later wishes to return to the fold. China has also stepped up to support international agreements. Shortly after Trump pulled the US out of the Paris Climate accord, China resolved to maintain its commitments. In the wake of the recent steel and aluminum tariffs and the proposed tariffs in the US section 301 intellectual property action, China has announced retaliatory tariffs against US actions (tit-for-tat), but has also vowed to bring their objections to the WTO dispute settlement body.

These are very significant announcements. It demonstrates that other countries are willing to take on a leadership position to maintain international cooperation even while the world’s largest economy threatens to stop playing by the rules it created. Hopefully, cooperation can be sustained. The alternative is that one punch by the US leads to a series of increasingly damaging counterpunches bringing the world economic system back into a prisoner’s dilemma not seen since the Great Depression.

Steve Suranovic is an Economics Professor at the George Washington University in Washington DC and is affiliated with the Elliott School's Institute for International Economic Policy. He is the author of an international economics textbook published online by Flat World Knowledge and a book titled “A Moderate Compromise: Economic Policy Choice in an Era of Globalization” (Palgrave-Macmillan 2010).